IFR should include s. 78(1)(a) inclusion (p.2)
- For greater certainty, an amount included in a taxpayer's income under s. 78(1)(a) should be included in its interest and financing revenues (IFR).
Failure to refer to interest which is not deductible under s. 18.2(2) (pp. 2-3)
- Interest, which is not deductible under the EIFEL rules, is not deemed under s. 80(2)(b) to be an obligation issued by the debtor, with the result that where such interest is forgiven, s. 80 would not apply, although an inclusion could arise under ss. 143.4 and 12(1)(x)(i).
- Furthermore, the definition of restricted interest and financing expenses (RIFE) should be amended to provide that the settlement of the interest should first reduce the taxpayer's RIFE to the extent that the amount paid in settlements of such interest is less than the amount of interest owing.
Broad scope of eligible group entity (p. 3-4)
- By including all related and affiliated persons, subject to limited exceptions, in the definition of eligible group entity, the exclusions from EIFEL require references to eligible group entities that are often impractical as taxpayers may be unable to identify all related and affiliated corporations and trusts and determine the IFE, IFR, foreign affiliates, and shareholders in respect of related or affiliated entities, and determine whether all or substantially all of the businesses, undertakings, and activities of those related or affiliated entities were carried on in Canada.
- The definition of eligible group entities should be amended to restrict it accordingly, for example, replacing "related" with "associated."
Eligible group entities in (b) and (c) should exclude those excluded under (a) (p. 4)
- Even where a corporation meets the test in para. (a) of “excluded entity”, if it is an eligible group entity in respect of a trust, the corporation and the trust must each meet one of paras. (b) and (c) in order for the trust to be an excluded entity. Accordingly, the definition of excluded entity should be amended such that eligible group entities referred to in paras. (b) and (c) exclude eligible group entities which are excluded entities under para. (a) of the definition.
Application of excluded entity tests to investee partnerships (p. 4)
- In order to determine whether a taxpayer is an excluded entity, the taxpayer must ascertain the taxable capital, net IFE, and Canadian operations of investee partnerships, not all of which may file a T5013 partnership return or agree to provide such detailed information. Accordingly, the definition of excluded entity should exclude from the determination certain partnerships where the taxpayer is de minimis investor.
REIT as tax-indifferent (pp. 4-5)
- The definition of “tax-indifferent” includes a trust resident in Canada if more than 50% of the fair market value of all interests as beneficiaries under the trust can be reasonably considered to be held directly or indirectly through one or more trusts or partnerships by any combination of tax exempts under s. 149 and non-resident persons.
- It can be challenging for a publicly traded mutual fund trust, such as a REIT, to determine whether it satisfies this definition of tax indifferent. Accordingly, the definition of tax indifferent should be amended to exclude mutual fund trusts which themselves would otherwise constitute excluded entities.
Upstream loan to a related Canadian corporation that is subject to Pt. XIII tax (pp. 5-7)
- Where a foreign affiliate makes an upstream loan to its Canadian corporate shareholder and the interest on such a loan is subject to Canadian withholding tax, the IFR definition ensures that the deduction to the taxpayer under s. 91(4) for such Canadian withholding tax does not reduce the amount added to the taxpayer's IFR with respect to the underlying interest income.
- The same appropriate result does not occur in the situation where, for example, Canco1 owns Canco2, which owns an FA which has made an upstream loan to Canco1, the interest on which is subject to withholding tax.
- If, for example, there was $100 of interest on which there was $25 of withholding tax and Canco2 was a pure holding company with no other sources of ATI, IFE, or IFR, the excess capacity generated by Canco2 would be $70, not $100. This anomaly arises because variable I of the excess capacity definition takes into account the absolute value of the taxpayer's negative ATI.
- Accordingly, para. (a) of variable C of the ATI definition should be amended to ensure that a deduction under s. 91(4) with respect to Canadian withholding tax that falls within variable G of the IFR definition is taken into account. In particular, paragraph (a) of variable C of the ATI definition could be reduced by an amount in respect of the income tax paid under s. 212(1) that is deducted under s. 91(4) in computing the taxpayer's income in respect of foreign accrual tax.
Excluded lease definition re a building should extend to the related land (p. 7)
- An excluded lease would include for instance the lease of building described in Reg. 1100(1.13)(a)(vi). The definition of excluded lease should be amended to clarify that it includes subjacent or immediately contiguous land that contributes to the use of the building.
Inappropriateness of Pt. VI.1 tax where non-resident shareholder (p. 12)
- Where the shareholder of a taxable preferred share is a non-resident person, the policy behind Part VI.1 tax being imposed is no longer applicable since, subsequent to 2008, a non-resident investor who deals at arm's length with the Canadian corporation is not subject to Canadian tax on interest paid by the Canadian corporation.
Desirability of expanding flipped property exclusions (pp. 13-15)
- The flipped property rules should be amended to aggregate the period of ownership of non-arm's length persons, for example, where there has been a transfer of capital property between spouses or the transfer of property to a corporation on a rollover basis.
- An Amalco should be considered to be the same corporation as in a continuation of its predecessors and the ownership period of a predecessor corporation in a winding up to which s. 88(1) applied should be included in determining whether the 365-day test has been met.
- The 365-day test should be considered to be met for a beneficiary who acquires property by way of a tax-deferred distribution under s. 107(2) if it was held for 365 consecutive days by the trust.
- The list of exclusions in s. 12(3) should also be expanded to include a graduated rate estate where the property would not have been a flipped property if sold by the deceased individual immediately prior to death.
Dividends determined re pref share redemption amount ((pp. 7-8)
- Para. (c) of the definition of substantive debt references a test under which the preferred shares bear a dividend rate that is fixed, or computed generally as a percentage of the FMV of the consideration for which the shares were issued, rather than as a percentage of the redemption amount of the shares, even though it is commercially common for dividends to be computed on the latter basis. Furthermore, para. (d) does not generally permit the preferred shares to be issued at a discount to their general redemption amount.
- Accordingly, the definition of substantive debt should be amended to accommodate the computation of dividends on shares computed by reference to their redemption amount, where they were not issued at anything other than at a shallow discount or shallow premium to their redemption amount.
Qualifying issuances falling over a year-end (pp. 7-9)
- The share buyback tax can apply in a punitive manner where a qualifying issuance occurs within a short period of time before or after a redemption, acquisition, or cancellation of a share but in a different taxation year.
- Accordingly, it is recommended that s. 183.3(2) be amended so that the Part II.2 tax for a particular taxation year be reduced by the fair market value of equity issued in a qualifying issuance made before the applicable balance due date for that taxation year and made within the one-year period prior to the beginning of that taxation year, to the extent that such qualifying issuances have not reduced Part II.2 tax in any other taxation year
Scope of related party butterfly exception (pp. 9-10)
- The time at which a share is to be characterized as a QSBCS or family farm/fishing corp. share (a “qualifying share”) for purposes of the s. 55(5)(e)(i) exemption is unclear, for example, where in a purification transaction the shares were not qualifying shares at the beginning of the series of transactions.
- Furthermore, a qualifying share is a share of an individual, so that the definition does not accommodate situations where, for example, a farming corporation was held by an individual through a holding company.
- Accordingly, the s. 55(5)(e)(i) rule should be amended to more clearly describe the circumstances in which siblings are related for purposes of s. 55, including clarifying the time at which a share must be a qualifying share and allowing otherwise qualifying shares to be owned by a corporation in appropriate circumstances.
Needed expansion of scope of FABI (pp. 10-11)
- As noted by commentators, the definition of foreign accrual business income (FABI) should be amended to include all income which would not be aggregate investment income had it been earned directly by the CCPC or substantive CCPC.
Restricted CRA discretion to extend election filing deadline (p. 11)
- S. 220(3.2) should be amended to eliminate the reference to a prescribed provision and Reg. 600 should be repealed.
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